A Goa Mining Tycoon, a Dal Merchant And a Punjabi Politician Walk Into a Bank...

How will Modi’s so-called surgical strike on black money play out for people with varying occupations and with various reasons for dealing with large cash transaction?

New Delhi: As 22 billion Rs 500 and Rs 1000 notes start to get sucked out of India’s formal and informal economy, attention is rightly shifting to the tussle between the black economy’s chartered accounts and the country’s tax departments.

While the Finance Ministry and Reserve Bank of India (RBI) have been largely quiet about how they plan on tracking tax evaders and movers of corrupt deals, if they decide to exchange their cash through banks, a few details have started coming out.

Basic identification is needed obviously for any exchange or deposit of cash. Revenue secretary Hasmukh Adhia has noted that any deposits made over Rs. 2.5 lakh will be reported straight to the income tax department by the bank in question.

To try to track the inevitable conversion of black money from cash to gold or jewellery, the tax department has also mandated that jewellers must first verify the permanent account number (PAN) of all buyers. Bank deposits made by any jewellers will be scrutinised against sales, to make sure gold isn’t being sold at an inflated margin.

How will Modi’s so-called surgical strike on black money play out for people with varying occupations and various reasons for dealing with large cash transactions? What kinds of black money will be stopped and what won’t? The Wire breaks it down for you by running through a number of fictional scenarios.

Breaking down the black money

Scenario 1: Ankit is a lawyer, working at a Tier-2 corporate law firm that accepts politically controversial cases. Because of this, he and his partners collect the majority of their fees in cash in order to avoid paying income tax and to accommodate clients who might prefer to pay only in cash. Ankit, a rather enterprising lawyer, has nearly Rs 1 crore in cash stashed away in the form of 1000 rupee notes and expects to collect 1-2 lakh every month in cash in the future as well.

Outcome 1: Ankit’s problem is simple, albeit divided into two issues. Firstly, he needs to find some way to get rid of his 1000 rupee notes. If he goes to his bank and deposits the Rs 1 crore he’s been hoarding, he will almost certainly get a notice from the income tax department asking him to explain the source of money. If he’s unable to convince the assessing officer in question, he’s likely to face penalties ranging from 15% to 50% of the income evaded.

He could try to launder the money by converting it to a different form of wealth: land, gold or jewellery have always been popular options for people of his income status. He could also put it through the now-buzzing discount business – money-changer agents who accept sums of Rs 10 lakh in form of Rs 500 and Rs 1000 notes and give you Rs 8 lakh in smaller notes in return. With both options, Ankit is likely to lose up to 30% cut of his currently stashed-away black money in order to pay-off the middle man and not get caught.

However, more importantly, his future revenue – the Rs 1 lakh to Rs 2 lakh he still collects every month from his clients – is unlikely to be disturbed. Why? Because from this week the new Rs. 500 and Rs. 2000 notes are coming back into circulation. The new Rs 1000 note will also likely be out in a few months. While the RBI has promised to monitor the issuance of Rs 2000 notes, it is unclear how they will do so in order to crack down on black money.

As long as his unscrupulous clients continue to pay him in cash, his supply of black money continues. He may start looking into cheaper tax havens in the future.

Home-buyers beware

Scenario 2: Anumeha Malkan, a 61-year old dowager, recently sold her home for a cool Rs 1.8 crore. Unfortunately, as with most deals conducted in Tier-3 cities, the sale was partly conducted by cash (roughly Rs 80 lakh) because the buyer of the property insisted that the purchase included a cash component. What does Anumeha do with that Rs 80 lakh – mostly in the form of 1000 rupee notes?

Outcome 2: Anumeha’s case, unfortunately, isn’t unique. There have been reports coming from across the country of people committing suicide after having recently conducted land transactions and now believing that their Rs 500 and Rs 1000 notes are useless. Cash transactions for real-estate deals are frowned upon and as of 2015 attract significant penalties but are still carried out often because they contain black money components or, as is the case across rural India, because farmers and agricultural workers prefer to conduct these deals outside the formal financial system.

Anumeha’s case is tough, primarily because in many Tier-2 and Tier-3 cities land transactions always include a cash component; it’s difficult to sell without participating in the black economy to a certain extent. Unlikely to look at any laundering mechanisms, she will have to either burn the cash component (Rs 80 lakh) or declare her money and accept the crippling penalties.

State election funds

Scenario 3: A certain Punjab politician has amassed a war chest of nearly Rs. 10 crore, mostly in Rs 1000 notes but also a decent chunk of Rs 500 notes, to be used for bribes and other often corrupt operational expenses. This money is unaccounted for and is the type that is often seized by the Election Commission in the run-up to the election.

Outcome 3: When the news of Modi’s decision to demonetise larger-value bills was announced, quick theories started doing the rounds as to how politicians with large amounts of black money would deal with the development? This scenario is inherently more interesting because the black money can’t be shifted abroad, because it’s needed at home, and it also can’t be converted to immovable assets because the money needs to retain a certain amount of liquidity.

With the Finance Ministry announcing that third-parties could deposit money on behalf of another person, quick speculation started making the rounds that politicians would start sending hundreds of their cadres with Rs 4000 at a time to various bank branches. Multiple campaign finance and policy experts The Wire spoke to pointed out that this was unlikely to happen because the income tax department (if it wanted to) could easily track people who made deposits over the course of many days.

Other options include putting it through money agents or even engaging in schemes such as the Railway-ticket black money process: Book the most expensive tickets you can right now (Rs 8000 for the Trivandrum Rajdhani) and get a refund later.

However, a far more attractive option for this Punjab politician would be to lean on  a district central cooperative bank or a sugar cooperative, which are key pillars of the agricultural economy in Punjab and often serve as launchpads for the politicians. As it happens, the politician in our scenario here has deep connections with one such cooperative bank; particularly with top community leaders in that district. When the bank receives the new notes, it will quietly exchange the old ones for the new Rs 2000 and Rs 1000 notes.

While the various financial and regulatory authorities could handle this and look into it, it is unclear at the moment whether they plan on doing so.

The merchant of dal

Scenario 4: Amitabh is a dal merchant from Uttar Pradesh who conducts his business almost entirely in cash and has been doing so for the last 15 years. The money earned from the dal business therefore is consequently severely under-reported in order to pay less tax. As it turns out, Amitabh and a few members of his family also own a proper movie hall in Lucknow where all customers (legitimately) pay cash. The cinema hall is regularly used to “whiten” some of his earnings from the dal business.

Outcome 4: Amitabh’s case is the classic example of how small businesses in semi-urban and rural India function to avoid paying taxes and to keep on hand cash needed for bribes and other corruption-related expenditure. The way his second business (a movie hall) is used to ‘whiten’ the revenue from his other cash-business is why many people believe that with the re-introduction of new Rs 500/1000/2000 notes, the issue of black money generation will continue. After all, the process by which black money is produced will not come to halt just because Rs 500 and Rs 1000 notes are taken away.

The new rules will likely not affect Amitabh at all. The cinema hall will allow him to “legitimately” convert all of his existing Rs 500 and Rs 1000 notes into newer currencies. In the event that not all of his black money can be ‘made white’ by fuelling it through his cinema business (which either reports it as revenue or use it for a number of other operational reasons), there are a number of less-than-legal mechanisms he can look towards. He can use a “cash-on-hand” firm – companies that have a number of illegal expenses which makes them appear as if they officially have a lot of cash on hand – receives his money back through a loan that must be repaid with interest (which, in this case, is nothing more than a money laundering fee).

The RBI and income tax department need to more aggressively tackle the source of black-money generation for this issue to be fixed. Otherwise, the new notes simply help Amitabh continue his black economy activities.

The daily worker

Scenario 5: Jhanka is a domestic worker from Jharkhand, who has no bank account. She’s tried to open one in the past, but has been turned down for a number of different reasons. She gets 15,000 rupees a month in cash, out of which she has been saving 5,000 rupees every month in Rs 500 notes for the past three years. She, therefore, has a savings of nearly 2 lakh in cash that she wants to eventually use to get her daughter educated and married.

Outcome 5: Jhanka is among the hundreds of millions working-class people who have perhaps been hit the hardest (and not in the intended way) by Modi’s decision to go after large-value bills. She cannot afford to head to the many illegal money exchange options that have popped up in her neighbourhood; parting with even 10% of her savings as a fee would be tragic.

One option is to enrol for an Aadhaar card, which will hopefully make it easier to sign up for a bank account. Other options include going back home to Jharkhand and signing up for a formal bank account with the help of a local banking correspondent.

Today’s newspapers were filled with a number of stories like Jhanka’s: Many of them keep very little small change on them and prefer having most of their savings in larger notes; the days after Modi’s speech are filled with anecdotes of people skipping breakfast and lunch or walking long distances instead of taking the bus or cycle-rickshaws. Others complain of having to lose a day’s pay by going to the bank to line up in long queues.

The mining tycoon

Scenario 6: The head of a large multinational mining firm, which has operations in places such as Goa and Orissa, extracts and exports more ore than he informs the government regulator. The tycoon does this in order to avoid paying royalties and tax.While he collects money for exporting 1000 tonnes a month, he shows the local regulator that he has only exported 800 tonnes. The balance money is coolly parked in the account of an offshore company.

Outcome 6: Black money produced and moved around by India’s largest companies has traditionally taken two forms: Either firms over-invoice imports or they under-report revenues and funnel the money into offshore accounts. Our example of the mining tycoon is one such case. The ban on Rs 500 notes and Rs 1,000 notes will matter very little to him; any expenses that need to be incurred locally can be managed later when the new Rs 1,000 and Rs 2,000 notes are in circulation.

The mining tycoon’s black money is stashed away in offshore tax havens and therefore highly unlikely to ever be deposited in an Indian bank. Getting rid of this black money will require greater regulatory oversight on the part of the local state government and mines ministry – in addition to more strict probes into the company’s offshore wealth.